S&P Downgrades Spain, Cites Mounting Risks From Debt

Standard & Poor’s downgraded its rating on Spain’s debt late Thursday by two notches on the country's debt concerns.

Specifically, the ratings service reduced its long-term sovereign credit rating on Spain to ‘BBB+’ from ‘A.’ S&P also lowered the short-term sovereign credit rating to ‘A-2′ from ‘A-1.′ The outlook on the long-term rating is negative.

S&P attributed the downgrades to “mounting risks to Spain’s net general government debt as a share of GDP in light of the contracting economy, in particular due to: the deterioration in the budget deficit trajectory for 2011-2015, in contrast with our previous projections, and the increasing likelihood that the government will need to provide further fiscal support to the banking sector.”

The service added that it believes “risks are rising to fiscal performance and flexibility, and to the sovereign debt burden, particularly in light of the increased contingent liabilities that could materialize on the government’s balance sheet.

The recession will continue to bite in Spain. S&P thinks real GDP will decline by 4 percent this year, followed by a contraction of 1 percent in 2013.

S&P also predicted that GDP contractions this year and next will be exacerbated by declining disposable incomes, private-sector deleveraging, the implementation of the government's front-loaded fiscal consolidation plan and the uncertain outlook for external demand in many of Spain's key trading partners.

S&P does not believe Spain can meet its budget deficit targets. It expects the deficit to reach 6.2 percent of GDP in 2012 and 4.8 percent in 2013 (up from 5.1 percent and 4.4 percent estimated before).

The agency also criticized euro zone policymakers' handling of the debt crisis.

“The strategy to manage the European sovereign debt crisis continues to lack effectiveness,” S&P said.

“We think credit conditions, and hence the economic outlook for Spain, could now deteriorate further than we anticipated earlier this year unless offsetting euro zone policy measures are implemented to support investor confidence and stabilize capital flows with the rest of the world.”